Housing in Southern Africa October 2015

Housing

in tough times affordable, or could move into a smaller and cheaper rental home.” And whilemany of us may think ‘it will never happen to us’, even in these current low interest rate times, our FNB Estate Agent Survey estimates that 13%of sellers are selling in order to “downscale due to financial pres- sure”. That is a significant number, and it was farmore significant around the 2008/9 ‘financial crisis’.

weakening economic growth rate as well as rising interest rates. But even if the house price index does not decline, says Loos, it is important to understand is that the index represents the national average house price growth trend. When a national index reaches a low positive growth, the chances are good that there is a portion of homes whose values are in decline, because not all areas perform exactly the same. The probability of home values of household’s that do come under financial pressure are more likely to decline, because part of the response to financial pressure/stress is often to cut back on home maintenance, speeding up building depreciation. In aweakening economy, job secu- rity deteriorates and incomes become less secure, raising the chance of financial pressure. On top of this, we are in an interest rate hiking cycle. Loos says, “A house is the one item that influences spending commit- ments more than any other single item. The implications extend to home maintenance, the rates and tariffs bill and insurance. And, home maintenance can only go so far. If the market is against you, a home’s value can still decline.” This is where there are potential

'safety' benefits to buying well within one’s means and being able to afford a sizeable 'deposit', thereby borrow- ing at less than 100% loan-to-value, perhaps at 90%or 80%. A lower loan- to-value provides something of an extra safeguard should home values decline, increasing one’s chance of being able to 'trade out' of a property should tough financial times hit. He adds, “The FNB Estate Agent Surveys shows a recent decline in the percentage of sellers selling to upgrade and a rising percentage of sellers selling in order to downscale. In addition, we have seen some decline in the percentage of buyers deemed to be first time buyers, as well as in single-status buyers.” “These are often younger buyers who can remain in the rental market for a bit longer or if need be, move in with their family. Of the sellers down- scaling due to financial pressure, the agents are also starting to indicate that more will rent as opposed to buying smaller.” “Such an apparent recent shift in home buying/selling patterns to- wards greater conservatism comes at a time when consumer confidence has plummeted. Such a shift cur- rently seems entirely appropriate,” concludes Loos. ■

“The big problemhere ariseswhen home values fall, because it limits the financially pressured households’ ability to 'trade out' of their proper- ties. The situation is known as nega- tive equity, i.e. a situation where the household owes more on the bond than what the home is worth, be- cause the home’s value has dropped. The home can still be sold, but it will only fetch a lower price, it will mean that there is still some bond debt outstanding.” This is the key reason why banks and homeowners alike would almost always like to see home values rising. And with the FNB House Price Index still rising year-on- year at 4.9% in August, there would appear little to worry about but the reality is that the index’s pace of inflation has been gradually slowing for over a year-and- a-half. This is a natural response to a

October 2015